Term life insurance versus permanent life insurance: which is better for your budget?

By Julie Davis

Julie Bawden-Davis is a Southern-California-based writer specializing in personal finance and insurance. Since 1983, her work has appeared in a wide variety of publications, including Family Circle, Ladies' Home Journal, Parenting, Entrepreneur, and The Los Angeles Times.

Life insurance is an important part of your financial foundation, so you want to buy the best insurance coverage within your budget.

According to LIMRA, an insurance research organization, in 2010 the sale of permanent life insurance, which covers you for life and includes an investment component, rose by 2 percent for whole life insurance and 21 percent for universal life. On the other hand, term life insurance--which lasts for a predetermined time and offers a guaranteed cash payout to beneficiaries if you die within the term period--dropped by 12 percent.

Ostensibly, the data from LIMRA suggests that permanent life is the answer, but the Wall Street Journal points out that the numbers reflect how life insurance companies have effectively promoted the perceived financial safety benefits of permanent life. Many forms of permanent life insurance, such as whole life, include a savings account called cash value that is typically invested in bonds and Treasury bills. During the stock market meltdown, bonds held up rather well.

Although cash value accounts had positive returns in a down market, premiums for permanent life insurance are substantially higher than term life. Understanding the advantages of term life and comparing them to permanent life can help you make a sound life insurance decision.

Term life insurance: savings and versatility

Permanent life insurance has higher premiums and doesn't initially yield investment savings. Buying a less expensive term life insurance policy and investing the difference is more cost-effective.

Additionally, term insurance offers more versatility by allowing you to tailor term lengths based on future financial obligations, such loan repayments or through a child's college years. However, if you buy term life insurance for a term length of less than 10 years, the Insurance Information Institute (III) advises purchasing a policy with renewal guarantees that will allow you to buy a new term policy without having to undergo a health exam to prove insurability.

Permanent life insurance still attractive to some

The tax-deferred savings of permanent life insurance policies works well for individuals with rising incomes and those who require life insurance for 30 years or more. Permanent insurance premiums are initially higher, but over time tend to be less expensive than purchasing a term life policy each time the policy expires.

Additionally, as the cash value grows over time, you can borrow against the account at an interest rate specified in the policy. Keep in mind that any unpaid loans against cash value will be deducted from the insurance benefit your beneficiaries receive when you die.

When term is the better choice

If you are looking for inexpensive life insurance coverage for a specified period of time, term life insurance is likely to be the best fit for you and your family. However, if you have a need for lifetime coverage, permanent life insurance may be a better life insurance policy--even at the price of higher premium payments.

By carefully weighing your budget and coverage needs, you can make the best life insurance decision for you and your family.